Indonesia Policy Makers Clash on Rate Moves as Economy Slows

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Indonesia’s government and the central bank clashed over where interest rates should go as the slowdown in Southeast Asia’s biggest economy deepened.

Authorities will gradually cut borrowing costs and should do so without deterring people from putting money in the bank, Vice President Jusuf Kalla told reporters in Jakarta on Thursday, after a meeting between the government and central bank. Bank Indonesia Governor Agus Martowardojo countered that with a pledge to keep a tight monetary stance.

Indonesia’s President Joko Widodo wants to lift economic expansion toward 7 percent, yet gross domestic product growth slowed to 4.7 percent in the first quarter from a year earlier, the weakest pace since 2009. The central bank is balancing government pressure to support the economy against efforts to curb inflation, a persistent current-account deficit and to prop up the rupiah, Asia’s worst performing currency this year.

“We don’t think Bank Indonesia has the space to cut policy rates near term,” said Hak Bin Chua, an economist at Bank of America Merrill Lynch in Singapore. “Markets may not take a rate cut well and the rupiah will likely see a selloff.”

The rupiah extended losses to close down 0.9 percent at 13,151 a dollar in Jakarta, according to prices from local banks. It’s dropped 5.8 percent this year.

Tight Stance

“Bank Indonesia will maintain a tight monetary stance to anchor inflation expectations and manage external pressures,” Governor Martowardojo said Thursday, less than two hours after Kalla’s remarks. The central bank will maintain financial stability and allow exchange-rate flexibility, while strengthening its policy mix, he said.

Bank Indonesia, which next meets on May 19, will coordinate with the government and be data-dependent in setting policy, the governor had said on Wednesday. He said Thursday that the authority is optimistic the economy will improve once the government starts spending, which is needed urgently.

“This is also a test of Widodo’s leadership,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “The central bank can’t afford to be perceived to be succumbing to political pressure. The sharp economic slowdown in the first quarter is a test of the central bank’s credibility.”

Finance Minister Bambang Brodjonegoro said on Wednesday that further rate cuts were possible this year if inflation fell to below 4 percent. Consumer prices rose 6.79 percent in April from a year earlier and haven’t increased by less than 4 percent since January 2013. The central bank is targeting price gains in the range of 3 percent to 5 percent this year.

“Everything starts with inflation,” Brodjonegoro said on a conference call with investors late Wednesday. “If the 4 percent becomes a reality, there is a possibility.”

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